3Jn tbe ~upreme Qtourt of ~ppeals
of West 19irginia 0 [1 ~ ~i--III~ No 16-1213 ~APR R ~~~7 1)II
H v - - ~I
_________________-+-_ RCRYLPERR-Yn-C-Lf~ SUPRE1lE COURT OF APPEALS
Of WEST VIRGINIA bull -J
CHEVRON USA INC Defendant Below Petitioner
vs
JOHN ROBERT BONAR ET AL Plaintiffs Below Respondents
PETITIONERS BRIEF
J Nicholas Ranjan (No 12946) KampL Gates LLP
KampL Gates Center Pittsburgh Pennsylvania 15222
(412) 355-6500 (telephone) (412) 355-6501 (facsimile)
nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
II
TABLE OF CONTENTS
TABLE OF AUTHORITIES iii
INTRODUCTION1
ASSIGNMENT OF ERROR 3
STATEMENT OF THE CASE 4
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement4
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate4
C The Proceedings Below 5
SUMMARY OF ARGUMENT7
STATEMENT REGARDING ORAL ARGUMENT AND DECISION 10
ARGUMENT11
A Standard of Review 11
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions11
1 This Court Has NeverRecognized Pre-Litigation Conduct As Giving Rise to Waiver 12
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable~ 15
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim 19
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide21
C The Bonar Owners Unconscionability Argument Should Be Rejected22
1
1 The Bonar Owners Failed to Establish Procedural Unconscionabilityshy 23
2 The Bonar Owners Failed to Establish Substantive Unconscionabilityshy 27
CONCLUSION 32
11
TABLE OF AUTHORITIES
Cases
BG Grp PLC v Republic ofArgentina 1348 Ct 1198 (2014) 21 22
Bird v Turner No 514-cv-97 2015 WL 5168575 (ND W Va Sept 12015) 29
Bradford v Rockwell Semiconductor Sys Inc 238 F3d 549 (4th Cir 2001) 27 28
Brown ex rel Brown v Genesis Healthcare Corp 228 W Va 646 724 SE2d 250 (2011) 23
Brown v Genesis Healthcare Corp 229 W Va 382 729 SE2d 217 (2012) 24
Cambridge Capital Grp v Pill 20 Fed Appx 121 (4th Cir 2001) 20
Citibank NA v Perry -SE2d - 2016 WL 6677944 (W Va Nov 102016) 11
Credit Acceptance Corp v Front 231 W Va 518 745 SE2d 556 (2013) 11
Donley v Sallie Mae Inc No 514-cv-165 2015 WL 1650097 (ND W Va Apr 14 2015) 28
Dunbar Fraternal Order ofPolice v City of Dunbar 218 W Va 239 624 SE2d 586 (2005) 2 17 18
Dwyer v Rang~ Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 (ND W Va Apr 24 2014) 30
Dytko v Chesapeake Appalachia LLC No 513-cv-150 2014 WL 2440496 (ND W Va May 30 2014) 24 25 26
Ehleiter v Grapetree Shores Inc 482 F3d 207 (3d Cir 2007) 22
EQT Corp v Miller No 111-cv-197 2012 WL 3839417 (ND W Va Sept 5 2012) 26
Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) 19
Flores v Gmri Inc No 115-cv-1073 2016 WL 726485 (MDNC Dec 15 2016) 22
Green Tree Fin Corp-Alabama v Randolph 531 US 79 (2000) 20
Growtech Partners v Accenture LLP 118 F Supp 3d 920 (SD Tex 2015) 14
111
Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 9 2012) 19
Highlands Wellmont Health Network Inc v John Deere Health Plan Inc 350 F3d 568 (6th Cir 2003) 13
Howsam v Dean Witter Reynolds Inc 537 US 79 (2002) 22
James v Client Servs Inc No 14-2480 2015 WL 3649473 (D Kan June 11 2015) 22
Kelley v Sallie Mae Inc No 514-cv-138 2015 WL 1650080 (ND W Va Apr 14 2015) 26
Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281 (WDNC 2011) 26
Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) 23
MicroStrategy Incv Lauricis 268 F3d 244 (4th Cir 2001) 7 13 20 21
Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 (1983) 8 20 22
Muriithi v Shuttle Exp Inc 712 F3d 173 (4th Cir 2013) 28 29
Natl Union Fire Ins Co of Pittsburgh v Miller 228 W Va 739 724 SE2d 343 (2012) 17
Nationstar Mortg LLC v West 237 W Va 84 785 SE2d 634 (2016) 23
Parsons v Halliburton Energy Servs Inc 237 W Va 138 785 SE2d 844 (2016) 12
Powell v ATampTMobility LLC 742 F Supp 2d 1285 (ND Ala 2010) 27
Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) 19
Servpro Intellectual Prop Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 (MD Tenn Nov 28 2016) 14
Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474 (ED Pa 2011) 26
State ex rel Johnson Controls Inc v Tucker 229 W Va 486 729 SE2d 808 (2012) 24
IV
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341 752 SE2d 372 (2013) 25
uS ex rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512 (SD W Va 2015) 26
United States v White 366 F3d 291 (4th Cir 2004) 20
Welborn Clinic v MedQuist Inc 301 F3d 634 (7th Cir 2002) 13
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 (SD W Va 2015) 16
Other Authorities
BLACKS LAw DICTIONARY (10th ed) 17
v
INTRODUCTION
Chevron and the Bonar Ownersl are parties to an oil and gas lease that
contains an arbitration agreement Starting in 2016 Chevron began taking certain
cost deductions in calculating the Bonar Owners oil and gas royalties which
Chevron believed it was entitled to do under the lease The Bonar Owners
disagreed But instead of commencing arbitration to resolve the dispute the Bonar
Owners filed a complaint in the Circuit Court of Marshall County Chevron
immediately moved to compel the case to arbitration The Circuit Court denied the
motion curiously holding that Chevrons pre-litigation conduct of taking the cost
deductions without itself first commencing arbitration waived its ability to later
compel it
The Circuit Courts decision was respectfully both erroneous and based on
flawed and circular reasoning It was erroneous because there is no support from
this Court that pre-litigation conduct can waive a contractual right to arbitration
The only context in which this Court has acknowledged the possibility of waiver is
during litigation-that is where a party engages in so much litigation activity that
it has waived the ability to change course and seek arbitration Pre-litigation
conduct on the other hand has never been recognized by this Court as a basis for
finding waiver of a contractual right to arbitration And even if as a general
matter pre-litigation conduct could theoretically waive the right to arbitration the
The Bonar Owners are Respondents John Robert Bonar and John amp Werner Law Offices PLLC
1
1
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
TABLE OF CONTENTS
TABLE OF AUTHORITIES iii
INTRODUCTION1
ASSIGNMENT OF ERROR 3
STATEMENT OF THE CASE 4
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement4
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate4
C The Proceedings Below 5
SUMMARY OF ARGUMENT7
STATEMENT REGARDING ORAL ARGUMENT AND DECISION 10
ARGUMENT11
A Standard of Review 11
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions11
1 This Court Has NeverRecognized Pre-Litigation Conduct As Giving Rise to Waiver 12
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable~ 15
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim 19
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide21
C The Bonar Owners Unconscionability Argument Should Be Rejected22
1
1 The Bonar Owners Failed to Establish Procedural Unconscionabilityshy 23
2 The Bonar Owners Failed to Establish Substantive Unconscionabilityshy 27
CONCLUSION 32
11
TABLE OF AUTHORITIES
Cases
BG Grp PLC v Republic ofArgentina 1348 Ct 1198 (2014) 21 22
Bird v Turner No 514-cv-97 2015 WL 5168575 (ND W Va Sept 12015) 29
Bradford v Rockwell Semiconductor Sys Inc 238 F3d 549 (4th Cir 2001) 27 28
Brown ex rel Brown v Genesis Healthcare Corp 228 W Va 646 724 SE2d 250 (2011) 23
Brown v Genesis Healthcare Corp 229 W Va 382 729 SE2d 217 (2012) 24
Cambridge Capital Grp v Pill 20 Fed Appx 121 (4th Cir 2001) 20
Citibank NA v Perry -SE2d - 2016 WL 6677944 (W Va Nov 102016) 11
Credit Acceptance Corp v Front 231 W Va 518 745 SE2d 556 (2013) 11
Donley v Sallie Mae Inc No 514-cv-165 2015 WL 1650097 (ND W Va Apr 14 2015) 28
Dunbar Fraternal Order ofPolice v City of Dunbar 218 W Va 239 624 SE2d 586 (2005) 2 17 18
Dwyer v Rang~ Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 (ND W Va Apr 24 2014) 30
Dytko v Chesapeake Appalachia LLC No 513-cv-150 2014 WL 2440496 (ND W Va May 30 2014) 24 25 26
Ehleiter v Grapetree Shores Inc 482 F3d 207 (3d Cir 2007) 22
EQT Corp v Miller No 111-cv-197 2012 WL 3839417 (ND W Va Sept 5 2012) 26
Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) 19
Flores v Gmri Inc No 115-cv-1073 2016 WL 726485 (MDNC Dec 15 2016) 22
Green Tree Fin Corp-Alabama v Randolph 531 US 79 (2000) 20
Growtech Partners v Accenture LLP 118 F Supp 3d 920 (SD Tex 2015) 14
111
Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 9 2012) 19
Highlands Wellmont Health Network Inc v John Deere Health Plan Inc 350 F3d 568 (6th Cir 2003) 13
Howsam v Dean Witter Reynolds Inc 537 US 79 (2002) 22
James v Client Servs Inc No 14-2480 2015 WL 3649473 (D Kan June 11 2015) 22
Kelley v Sallie Mae Inc No 514-cv-138 2015 WL 1650080 (ND W Va Apr 14 2015) 26
Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281 (WDNC 2011) 26
Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) 23
MicroStrategy Incv Lauricis 268 F3d 244 (4th Cir 2001) 7 13 20 21
Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 (1983) 8 20 22
Muriithi v Shuttle Exp Inc 712 F3d 173 (4th Cir 2013) 28 29
Natl Union Fire Ins Co of Pittsburgh v Miller 228 W Va 739 724 SE2d 343 (2012) 17
Nationstar Mortg LLC v West 237 W Va 84 785 SE2d 634 (2016) 23
Parsons v Halliburton Energy Servs Inc 237 W Va 138 785 SE2d 844 (2016) 12
Powell v ATampTMobility LLC 742 F Supp 2d 1285 (ND Ala 2010) 27
Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) 19
Servpro Intellectual Prop Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 (MD Tenn Nov 28 2016) 14
Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474 (ED Pa 2011) 26
State ex rel Johnson Controls Inc v Tucker 229 W Va 486 729 SE2d 808 (2012) 24
IV
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341 752 SE2d 372 (2013) 25
uS ex rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512 (SD W Va 2015) 26
United States v White 366 F3d 291 (4th Cir 2004) 20
Welborn Clinic v MedQuist Inc 301 F3d 634 (7th Cir 2002) 13
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 (SD W Va 2015) 16
Other Authorities
BLACKS LAw DICTIONARY (10th ed) 17
v
INTRODUCTION
Chevron and the Bonar Ownersl are parties to an oil and gas lease that
contains an arbitration agreement Starting in 2016 Chevron began taking certain
cost deductions in calculating the Bonar Owners oil and gas royalties which
Chevron believed it was entitled to do under the lease The Bonar Owners
disagreed But instead of commencing arbitration to resolve the dispute the Bonar
Owners filed a complaint in the Circuit Court of Marshall County Chevron
immediately moved to compel the case to arbitration The Circuit Court denied the
motion curiously holding that Chevrons pre-litigation conduct of taking the cost
deductions without itself first commencing arbitration waived its ability to later
compel it
The Circuit Courts decision was respectfully both erroneous and based on
flawed and circular reasoning It was erroneous because there is no support from
this Court that pre-litigation conduct can waive a contractual right to arbitration
The only context in which this Court has acknowledged the possibility of waiver is
during litigation-that is where a party engages in so much litigation activity that
it has waived the ability to change course and seek arbitration Pre-litigation
conduct on the other hand has never been recognized by this Court as a basis for
finding waiver of a contractual right to arbitration And even if as a general
matter pre-litigation conduct could theoretically waive the right to arbitration the
The Bonar Owners are Respondents John Robert Bonar and John amp Werner Law Offices PLLC
1
1
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
1 The Bonar Owners Failed to Establish Procedural Unconscionabilityshy 23
2 The Bonar Owners Failed to Establish Substantive Unconscionabilityshy 27
CONCLUSION 32
11
TABLE OF AUTHORITIES
Cases
BG Grp PLC v Republic ofArgentina 1348 Ct 1198 (2014) 21 22
Bird v Turner No 514-cv-97 2015 WL 5168575 (ND W Va Sept 12015) 29
Bradford v Rockwell Semiconductor Sys Inc 238 F3d 549 (4th Cir 2001) 27 28
Brown ex rel Brown v Genesis Healthcare Corp 228 W Va 646 724 SE2d 250 (2011) 23
Brown v Genesis Healthcare Corp 229 W Va 382 729 SE2d 217 (2012) 24
Cambridge Capital Grp v Pill 20 Fed Appx 121 (4th Cir 2001) 20
Citibank NA v Perry -SE2d - 2016 WL 6677944 (W Va Nov 102016) 11
Credit Acceptance Corp v Front 231 W Va 518 745 SE2d 556 (2013) 11
Donley v Sallie Mae Inc No 514-cv-165 2015 WL 1650097 (ND W Va Apr 14 2015) 28
Dunbar Fraternal Order ofPolice v City of Dunbar 218 W Va 239 624 SE2d 586 (2005) 2 17 18
Dwyer v Rang~ Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 (ND W Va Apr 24 2014) 30
Dytko v Chesapeake Appalachia LLC No 513-cv-150 2014 WL 2440496 (ND W Va May 30 2014) 24 25 26
Ehleiter v Grapetree Shores Inc 482 F3d 207 (3d Cir 2007) 22
EQT Corp v Miller No 111-cv-197 2012 WL 3839417 (ND W Va Sept 5 2012) 26
Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) 19
Flores v Gmri Inc No 115-cv-1073 2016 WL 726485 (MDNC Dec 15 2016) 22
Green Tree Fin Corp-Alabama v Randolph 531 US 79 (2000) 20
Growtech Partners v Accenture LLP 118 F Supp 3d 920 (SD Tex 2015) 14
111
Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 9 2012) 19
Highlands Wellmont Health Network Inc v John Deere Health Plan Inc 350 F3d 568 (6th Cir 2003) 13
Howsam v Dean Witter Reynolds Inc 537 US 79 (2002) 22
James v Client Servs Inc No 14-2480 2015 WL 3649473 (D Kan June 11 2015) 22
Kelley v Sallie Mae Inc No 514-cv-138 2015 WL 1650080 (ND W Va Apr 14 2015) 26
Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281 (WDNC 2011) 26
Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) 23
MicroStrategy Incv Lauricis 268 F3d 244 (4th Cir 2001) 7 13 20 21
Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 (1983) 8 20 22
Muriithi v Shuttle Exp Inc 712 F3d 173 (4th Cir 2013) 28 29
Natl Union Fire Ins Co of Pittsburgh v Miller 228 W Va 739 724 SE2d 343 (2012) 17
Nationstar Mortg LLC v West 237 W Va 84 785 SE2d 634 (2016) 23
Parsons v Halliburton Energy Servs Inc 237 W Va 138 785 SE2d 844 (2016) 12
Powell v ATampTMobility LLC 742 F Supp 2d 1285 (ND Ala 2010) 27
Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) 19
Servpro Intellectual Prop Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 (MD Tenn Nov 28 2016) 14
Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474 (ED Pa 2011) 26
State ex rel Johnson Controls Inc v Tucker 229 W Va 486 729 SE2d 808 (2012) 24
IV
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341 752 SE2d 372 (2013) 25
uS ex rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512 (SD W Va 2015) 26
United States v White 366 F3d 291 (4th Cir 2004) 20
Welborn Clinic v MedQuist Inc 301 F3d 634 (7th Cir 2002) 13
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 (SD W Va 2015) 16
Other Authorities
BLACKS LAw DICTIONARY (10th ed) 17
v
INTRODUCTION
Chevron and the Bonar Ownersl are parties to an oil and gas lease that
contains an arbitration agreement Starting in 2016 Chevron began taking certain
cost deductions in calculating the Bonar Owners oil and gas royalties which
Chevron believed it was entitled to do under the lease The Bonar Owners
disagreed But instead of commencing arbitration to resolve the dispute the Bonar
Owners filed a complaint in the Circuit Court of Marshall County Chevron
immediately moved to compel the case to arbitration The Circuit Court denied the
motion curiously holding that Chevrons pre-litigation conduct of taking the cost
deductions without itself first commencing arbitration waived its ability to later
compel it
The Circuit Courts decision was respectfully both erroneous and based on
flawed and circular reasoning It was erroneous because there is no support from
this Court that pre-litigation conduct can waive a contractual right to arbitration
The only context in which this Court has acknowledged the possibility of waiver is
during litigation-that is where a party engages in so much litigation activity that
it has waived the ability to change course and seek arbitration Pre-litigation
conduct on the other hand has never been recognized by this Court as a basis for
finding waiver of a contractual right to arbitration And even if as a general
matter pre-litigation conduct could theoretically waive the right to arbitration the
The Bonar Owners are Respondents John Robert Bonar and John amp Werner Law Offices PLLC
1
1
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
TABLE OF AUTHORITIES
Cases
BG Grp PLC v Republic ofArgentina 1348 Ct 1198 (2014) 21 22
Bird v Turner No 514-cv-97 2015 WL 5168575 (ND W Va Sept 12015) 29
Bradford v Rockwell Semiconductor Sys Inc 238 F3d 549 (4th Cir 2001) 27 28
Brown ex rel Brown v Genesis Healthcare Corp 228 W Va 646 724 SE2d 250 (2011) 23
Brown v Genesis Healthcare Corp 229 W Va 382 729 SE2d 217 (2012) 24
Cambridge Capital Grp v Pill 20 Fed Appx 121 (4th Cir 2001) 20
Citibank NA v Perry -SE2d - 2016 WL 6677944 (W Va Nov 102016) 11
Credit Acceptance Corp v Front 231 W Va 518 745 SE2d 556 (2013) 11
Donley v Sallie Mae Inc No 514-cv-165 2015 WL 1650097 (ND W Va Apr 14 2015) 28
Dunbar Fraternal Order ofPolice v City of Dunbar 218 W Va 239 624 SE2d 586 (2005) 2 17 18
Dwyer v Rang~ Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 (ND W Va Apr 24 2014) 30
Dytko v Chesapeake Appalachia LLC No 513-cv-150 2014 WL 2440496 (ND W Va May 30 2014) 24 25 26
Ehleiter v Grapetree Shores Inc 482 F3d 207 (3d Cir 2007) 22
EQT Corp v Miller No 111-cv-197 2012 WL 3839417 (ND W Va Sept 5 2012) 26
Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) 19
Flores v Gmri Inc No 115-cv-1073 2016 WL 726485 (MDNC Dec 15 2016) 22
Green Tree Fin Corp-Alabama v Randolph 531 US 79 (2000) 20
Growtech Partners v Accenture LLP 118 F Supp 3d 920 (SD Tex 2015) 14
111
Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 9 2012) 19
Highlands Wellmont Health Network Inc v John Deere Health Plan Inc 350 F3d 568 (6th Cir 2003) 13
Howsam v Dean Witter Reynolds Inc 537 US 79 (2002) 22
James v Client Servs Inc No 14-2480 2015 WL 3649473 (D Kan June 11 2015) 22
Kelley v Sallie Mae Inc No 514-cv-138 2015 WL 1650080 (ND W Va Apr 14 2015) 26
Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281 (WDNC 2011) 26
Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) 23
MicroStrategy Incv Lauricis 268 F3d 244 (4th Cir 2001) 7 13 20 21
Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 (1983) 8 20 22
Muriithi v Shuttle Exp Inc 712 F3d 173 (4th Cir 2013) 28 29
Natl Union Fire Ins Co of Pittsburgh v Miller 228 W Va 739 724 SE2d 343 (2012) 17
Nationstar Mortg LLC v West 237 W Va 84 785 SE2d 634 (2016) 23
Parsons v Halliburton Energy Servs Inc 237 W Va 138 785 SE2d 844 (2016) 12
Powell v ATampTMobility LLC 742 F Supp 2d 1285 (ND Ala 2010) 27
Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) 19
Servpro Intellectual Prop Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 (MD Tenn Nov 28 2016) 14
Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474 (ED Pa 2011) 26
State ex rel Johnson Controls Inc v Tucker 229 W Va 486 729 SE2d 808 (2012) 24
IV
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341 752 SE2d 372 (2013) 25
uS ex rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512 (SD W Va 2015) 26
United States v White 366 F3d 291 (4th Cir 2004) 20
Welborn Clinic v MedQuist Inc 301 F3d 634 (7th Cir 2002) 13
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 (SD W Va 2015) 16
Other Authorities
BLACKS LAw DICTIONARY (10th ed) 17
v
INTRODUCTION
Chevron and the Bonar Ownersl are parties to an oil and gas lease that
contains an arbitration agreement Starting in 2016 Chevron began taking certain
cost deductions in calculating the Bonar Owners oil and gas royalties which
Chevron believed it was entitled to do under the lease The Bonar Owners
disagreed But instead of commencing arbitration to resolve the dispute the Bonar
Owners filed a complaint in the Circuit Court of Marshall County Chevron
immediately moved to compel the case to arbitration The Circuit Court denied the
motion curiously holding that Chevrons pre-litigation conduct of taking the cost
deductions without itself first commencing arbitration waived its ability to later
compel it
The Circuit Courts decision was respectfully both erroneous and based on
flawed and circular reasoning It was erroneous because there is no support from
this Court that pre-litigation conduct can waive a contractual right to arbitration
The only context in which this Court has acknowledged the possibility of waiver is
during litigation-that is where a party engages in so much litigation activity that
it has waived the ability to change course and seek arbitration Pre-litigation
conduct on the other hand has never been recognized by this Court as a basis for
finding waiver of a contractual right to arbitration And even if as a general
matter pre-litigation conduct could theoretically waive the right to arbitration the
The Bonar Owners are Respondents John Robert Bonar and John amp Werner Law Offices PLLC
1
1
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 9 2012) 19
Highlands Wellmont Health Network Inc v John Deere Health Plan Inc 350 F3d 568 (6th Cir 2003) 13
Howsam v Dean Witter Reynolds Inc 537 US 79 (2002) 22
James v Client Servs Inc No 14-2480 2015 WL 3649473 (D Kan June 11 2015) 22
Kelley v Sallie Mae Inc No 514-cv-138 2015 WL 1650080 (ND W Va Apr 14 2015) 26
Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281 (WDNC 2011) 26
Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) 23
MicroStrategy Incv Lauricis 268 F3d 244 (4th Cir 2001) 7 13 20 21
Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 (1983) 8 20 22
Muriithi v Shuttle Exp Inc 712 F3d 173 (4th Cir 2013) 28 29
Natl Union Fire Ins Co of Pittsburgh v Miller 228 W Va 739 724 SE2d 343 (2012) 17
Nationstar Mortg LLC v West 237 W Va 84 785 SE2d 634 (2016) 23
Parsons v Halliburton Energy Servs Inc 237 W Va 138 785 SE2d 844 (2016) 12
Powell v ATampTMobility LLC 742 F Supp 2d 1285 (ND Ala 2010) 27
Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) 19
Servpro Intellectual Prop Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 (MD Tenn Nov 28 2016) 14
Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474 (ED Pa 2011) 26
State ex rel Johnson Controls Inc v Tucker 229 W Va 486 729 SE2d 808 (2012) 24
IV
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341 752 SE2d 372 (2013) 25
uS ex rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512 (SD W Va 2015) 26
United States v White 366 F3d 291 (4th Cir 2004) 20
Welborn Clinic v MedQuist Inc 301 F3d 634 (7th Cir 2002) 13
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 (SD W Va 2015) 16
Other Authorities
BLACKS LAw DICTIONARY (10th ed) 17
v
INTRODUCTION
Chevron and the Bonar Ownersl are parties to an oil and gas lease that
contains an arbitration agreement Starting in 2016 Chevron began taking certain
cost deductions in calculating the Bonar Owners oil and gas royalties which
Chevron believed it was entitled to do under the lease The Bonar Owners
disagreed But instead of commencing arbitration to resolve the dispute the Bonar
Owners filed a complaint in the Circuit Court of Marshall County Chevron
immediately moved to compel the case to arbitration The Circuit Court denied the
motion curiously holding that Chevrons pre-litigation conduct of taking the cost
deductions without itself first commencing arbitration waived its ability to later
compel it
The Circuit Courts decision was respectfully both erroneous and based on
flawed and circular reasoning It was erroneous because there is no support from
this Court that pre-litigation conduct can waive a contractual right to arbitration
The only context in which this Court has acknowledged the possibility of waiver is
during litigation-that is where a party engages in so much litigation activity that
it has waived the ability to change course and seek arbitration Pre-litigation
conduct on the other hand has never been recognized by this Court as a basis for
finding waiver of a contractual right to arbitration And even if as a general
matter pre-litigation conduct could theoretically waive the right to arbitration the
The Bonar Owners are Respondents John Robert Bonar and John amp Werner Law Offices PLLC
1
1
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341 752 SE2d 372 (2013) 25
uS ex rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512 (SD W Va 2015) 26
United States v White 366 F3d 291 (4th Cir 2004) 20
Welborn Clinic v MedQuist Inc 301 F3d 634 (7th Cir 2002) 13
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 (SD W Va 2015) 16
Other Authorities
BLACKS LAw DICTIONARY (10th ed) 17
v
INTRODUCTION
Chevron and the Bonar Ownersl are parties to an oil and gas lease that
contains an arbitration agreement Starting in 2016 Chevron began taking certain
cost deductions in calculating the Bonar Owners oil and gas royalties which
Chevron believed it was entitled to do under the lease The Bonar Owners
disagreed But instead of commencing arbitration to resolve the dispute the Bonar
Owners filed a complaint in the Circuit Court of Marshall County Chevron
immediately moved to compel the case to arbitration The Circuit Court denied the
motion curiously holding that Chevrons pre-litigation conduct of taking the cost
deductions without itself first commencing arbitration waived its ability to later
compel it
The Circuit Courts decision was respectfully both erroneous and based on
flawed and circular reasoning It was erroneous because there is no support from
this Court that pre-litigation conduct can waive a contractual right to arbitration
The only context in which this Court has acknowledged the possibility of waiver is
during litigation-that is where a party engages in so much litigation activity that
it has waived the ability to change course and seek arbitration Pre-litigation
conduct on the other hand has never been recognized by this Court as a basis for
finding waiver of a contractual right to arbitration And even if as a general
matter pre-litigation conduct could theoretically waive the right to arbitration the
The Bonar Owners are Respondents John Robert Bonar and John amp Werner Law Offices PLLC
1
1
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
INTRODUCTION
Chevron and the Bonar Ownersl are parties to an oil and gas lease that
contains an arbitration agreement Starting in 2016 Chevron began taking certain
cost deductions in calculating the Bonar Owners oil and gas royalties which
Chevron believed it was entitled to do under the lease The Bonar Owners
disagreed But instead of commencing arbitration to resolve the dispute the Bonar
Owners filed a complaint in the Circuit Court of Marshall County Chevron
immediately moved to compel the case to arbitration The Circuit Court denied the
motion curiously holding that Chevrons pre-litigation conduct of taking the cost
deductions without itself first commencing arbitration waived its ability to later
compel it
The Circuit Courts decision was respectfully both erroneous and based on
flawed and circular reasoning It was erroneous because there is no support from
this Court that pre-litigation conduct can waive a contractual right to arbitration
The only context in which this Court has acknowledged the possibility of waiver is
during litigation-that is where a party engages in so much litigation activity that
it has waived the ability to change course and seek arbitration Pre-litigation
conduct on the other hand has never been recognized by this Court as a basis for
finding waiver of a contractual right to arbitration And even if as a general
matter pre-litigation conduct could theoretically waive the right to arbitration the
The Bonar Owners are Respondents John Robert Bonar and John amp Werner Law Offices PLLC
1
1
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
kind of pre-litigation conduct here-simple performance (or alleged nonshy
performance) of another provision of the contract--cannot give rise to waiver
The Circuit Courts reasoning was also flawed because the court effectively
found that the alleged wrongful conduct that gave rise to the claim at hand (the
taking of certain cost deductions) in and of itself waived the right to arbitration
In other words under the Circuit Courts implicit circular interpretation of the
arbitration agreement any time that a contracting party performs under a contract
in a way that could be construed by the other as a potential breach a waiver of the
dispute-resolution provision in the agreement would automatically occur Such an
interpretation runs afoul of this Courts familiar canon against interpreting
contracts in a manner that would create an absurd result See Dunbar Fraternal
Order ofPolice v City ofDunbar 218 W Va 239 244624 SE2d 586591 (2005)
(Generally this Court will not interpret a contract in a manner that creates an
absurd result)
The Circuit Courts decision is troubling and eviscerates the contractually
agreed-to arbitration agreement of the parties Respectfully this Court should
reverse
2
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
ASSIGNMENT OF ERROR
The Circuit Court erred when it concluded that Chevron waived its
contractual right to arbitration through its alleged pre-litigation conduct of
unilaterally taking cost deductions under the lease without first seeking permission
through arbitration
3
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
STATEMENT OF THE CASE
A The Parties Entered Into an Oil and Gas Lease Containing an Arbitration Agreement
On August 6 2010 TriEnergy Holdings LLC entered into an oil and gas
lease with Grace L Bonar and John Robert Bonar (App 5a-6a at ~~ 4-5) After
the execution of the original lease there were various assignments of the lease
whereby Ms Bonar transferred her rights under the lease to Mr Bonar and John amp
Werner Law Offices PLLC (App 6a at ~ 5) Chevron became the successor-inshy
interest to all of TriEnergy Holdings LLCs rights and obligations under the Lease
(App 6a at ~ 5) Through these assignments it is undisputed that the Bonar
Owners and Chevron are the present parties under the lease (App 5a-6a at ~~ 4shy
5)
The lease contains the following arbitration provision which is the provision
at issue in this appeal
ARBITRATION - Any question concerning this lease or performance thereunder shall be ascertained and determined by three disinterested arbitrators one thereof to be appointed by the Lessor one by the Lessee and the third by the two so appointed as aforesaid and the award of such three persons shall be final and conclusive The cost of such arbitration will be borne equally by the parties
(App 36a at ~ 17) This provision appears on the second page of a three-page
document and is labeled in all capitals ARBITRATION (App 36a at ~ 17)
B The Bonar Owners Sued Chevron Despite the Clear Agreement to Arbitrate
Notwithstanding the clear agreement to arbitrate the Bonar Owners filed a
complaint on October 15 2016 in the Circuit Court In the complaint the Bonar
4
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
Owners alleged that Chevron was wrongfully and unlawfully deducting costs from
[their] respective royalties (App 9a at 21) From this core allegation the Bonar
Owners sought a declaration that Chevron was breaching the lease and requested
an order (i) prohibiting Chevron from taking any cost deductions from the Bonar
Owners future royalties and (ii) requiring Chevron to repay the Bonar Owners for
all deductions taken to date (App 9a-10a at 24)
C The Proceedings Below
After the complaint was filed Chevrons first substantive response in the
case was to move to compel arbitration (App 22a-24a) Chevron argued that the
Bonar Owners claim fell within the broad scope of the arbitration agreement and
therefore the Bonar Owners should be compelled to arbitrate their claim against
Chevron consistent with mandates of the Federal Arbitration Act 9 USC sect 1 et
seq (the FAA) West Virginia law and the unambiguous terms of the lease (See
App 25a-32a)
In response the Bonar Owners did not dispute that their claim fell within the
broad scope of the arbitration agreement (App89a-98a) Insteadin their
memorandum in opposition the Bonar Owners sole argument was that the
arbitration agreement is unconscionable and therefore unenforceable (App 89ashy
98a) Chevron filed a reply memorandum refuting the unconscionability argument
(App 117a-125a)
The Circuit Court held an oral argument on Chevrons motion to compel
arbitration on November 302016 (App1287-182a) A few minutes before the
5
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
start of the oral argument the Bonar Owners provided Chevrons counsel with an
affidavit from Mr Bonar (App 183a-185a) The Circuit Court accepted Mr
Bonars affidavit into the record over Chevrons objection (App 166a at 395-6)
At the oral argument the Bonar Owners changed course and argued for the
first time that Chevron had waived its right to arbitrate through its pre-litigation
conduct Specifically the Bonar Owners argued that Chevron acted inconsistently
with the right to arbitrate by unilaterally deciding the question of whether
certain cost deductions were permissible without first submitting that dispute to
arbitration (App 159a at 326-10)
The Circuit Court agreed denied Chevrons motion to compel arbitration and
adopted the Bonar Owners waiver argument (App 1a-3a) The Circuit Court
found that defendant by its pre-litigation conduct in unilaterally commencing
certain cost deductions from plaintiffs royalties without first seeking through
arbitration the authority to do so has waived any contractual right to compel
plaintiffs into arbitration on the question of costs (App2a) As a result of this
finding the Circuit Court decided it was unnecessary to make further judicial
findings on the parties contentions respecting unconscionability (App2a)
6
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
SUMMARY OF ARGUMENT
The Circuit Courts decision that Chevron waived its contractual right to
arbitrate through its pre-litigation conduct is in error and should be reversed for at
least the following three reasons
First there is no legal support from this Court to conclude that pre-litigation
conduct can waive a partys ability middotto invoke an arbitration provision And to the
extent that the Circuit Court interpreted the lease in a way that would support
such a conclusion such an interpretation is untenable and should be rejected
Second even ifpre-litigation conduct could give rise to waiver the Bonar
Owners did not satisfy their evidentiary burden to sustain the Circuit Courts
decision As the Fourth Circuit has stated the party opposing arbitration bears the
heavy burden of proving waiver See MicroStrategy Inc v Lauricis 268 F3d 244
251 (4th Cir 2001) The only evidence that the Bonar Owners presented was Mr
Bonars affidavit which stated that he has directly interacted with representatives
of Chevron on a variety of questions concerning the Lease and resolved the
questions without arbitration (App 184a at ~ 13) This vague statement falls
far short of proving that Chevron waived the right to arbitrate any matter that later
matured into a formal legal dispute
Third to the extent that the Bonar Owners waiver argument regarding preshy
litigation conduct is viable it was an argument that the arbitrators should have
decided not the court The Supreme Court of the United States recently stated in
dicta in BG Group PLC v Republic ofArgentina that questions of waiver when
7
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
viewed as preconditions to arbitration are procedural matters to be decided by the
arbitrators 134 S Ct 1198 1207 (2014) (citing Moses H Cone Meml Hosp v
Mercury Constr Corp 460 US 1 24-25 (1983raquo
In addition to the waiver issue Chevron anticipates that the Bonar Owners
may attempt to argue that the arbitration provision is unconscionable as an
alternative way for this Court to affirm the Circuit Courts decision Accordingly
Chevron addresses that argument below
In order to meet their burden of establishing unconscionability the Bonar
Owners were required to prove that the arbitration provision is both procedurally
and substantively unconscionable Procedural unconscionability is found where
there is unfairness in the bargaining process while substantive unconscionability is
found where a term is too one-sided The Bonar Owners never claimed that there
was unfairness in the bargaining process and therefore there can be no finding of
unconscionability
Even if the Bonar Owners had proven procedural unconscionability their
argument would still fail because there is no substantive unconscionability The
Bonar Owners argued that the arbitration agreement is substantively
unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a) However the Bonar Owners failed to offer
competent evidence definitively proving the costs of arbitration or that those costs
are prohibitive instead the Bonar Owners only offered a speculative guess as to the
potential costs of the arbitration and importantly did not contend that they could
8
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
not afford those alleged costs Therefore the Bonar Owners are bound to arbitrate
their claim as they agreed in the lease
9
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Chevron respectfully requests oral argument pursuant to Rule 19 This
appeal concerns narrow issues oflaw such as whether certain pre-litigation conduct
can serve as the basis for waiver of the contractual right to arbitration This case
also concerns insufficient evidence or a result against the weight of the evidenceshy
specifically the Bonar Owners failure to adduce sufficient evidence to support their
waiver and unconscionability arguments
10
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
ARGUMENT
A Standard of Review
An order denying a motion to compel arbitration is an interlocutory ruling
which is subject to immediate appeal under the collateral order doctrine SyL Pt 1
Credit Acceptance C9rp v Front 231 W Va 518 519 745 SE2d 556557 (2013)
The Court reviews such an order de novo Citibank NA v Perry -SE2d -
2016 WL 6677944 at 3 (W Va Nov 102016)
Insofar as the resolution of this matter requires the Court to consider the
language of the lease this Court has held that it is the province of the Court to
interpret a written contract Id (all internals omitted) Therefore this Court
applies a de novo standard of review to a circuit courts interpretation of a
contract Id (all internals omitted)
B The Circuit Court Erred When It Found that Chevron Waived Its Contractual Right to Arbitration Through Taking Cost Deductions
The Circuit Court erred when it reached the unprecedented decision that
defendant by its pre-litigation conduct has waived any contractual right to
compel plaintiffs into arbitration (App2a) As discussed below this decision was
erroneous because (i) there is no support from this Courts decisions that preshy
litigation conduct can give rise to waiver (particularly the pre-litigation conduct at
issue here) (ii) interpreting the arbitration agreement to suggest such a result was
improper (iii) the Bonar Owners adduced insufficient evidence to support their
claim of waiver and (iv) the waiver claim was in any event for the arbitrators to
decide not the Circuit Court
11
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
1 This Court Has Never Recognized Pre-Litigation Conduct As Giving Rise to Waiver
This Court has never held that a party can waive its contractual right to
arbitration through pre-litigation conduct Instead all of this Courts cases
addressing waiver of the right to arbitrate concern whether or to what degree the
other party waived its right to arbitrate by participating in litigation See eg
Parsons v Halliburton Energy Servs Inc 237 W Va 138 147-48 785 SE2d 844
854-55 (2016) (The parties in this case dispute what circumstances are required to
prove a party waived its contractual right to arbitrate by participating in
litigation) Citibank 2016 WL 6677944 at 3 (reviewing circuit court order finding
that Citibank effectively waived any purported arbitration rights it once held
because Citibank inter alia voluntarily selected Boone County Circuit Court as its
preferred forum litigated its disputes with Mr Perry in this Court agreed to an
amended scheduling order allowing for counterclaims issued fact witness
disclosures requested judgment on the pleadings and waited nearly five years to
invoke its purported contractual right to arbitrate)2
Consistent with this Courts decisions the Fourth Circuit has explained that
a party may waive its right to insist on arbitration if the party seeking to enforce
an arbitration provision so substantially utilizes the litigation machinery that to
This Court did not find waiver in either of these cases See eg Parsons 785 SE2d at 854-55 (There is nothing in the record to suggest the defendant expressly waived its right to arbitrate The defendant also did not implicitly waive its contractual right to arbitration by answering or responding to the civil complaint without asserting its right) Citibank 2016 WL 6677944 at 5 ([W]e find no waiver by Citibank)
12
2
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
subsequently permit arbitration would prejudice the party opposing [enforcement of
the provision] MicroStrategy 268 F3d at 249 (internal marks and citation
omitted) Simply put there is no support from this Court or from any West Virginia
federal court endorsing pre-litigation conduct as a basis for waiver
In a few cases outside of West Virginia other courts have been presented
with arguments pertaining to pre-litigation conduct in this waiver context These
cases have typically involved situations where pre-suit correspondence has been
exchanged in which one of the parties initially refused to agree to a proposed
arbitration or where one of the parties refused to engage in settlement discussions
or otherwise engagedin delay tactics The courts in those cases have refused to find
waiver based on that pre-litigation conduct affirming the principle that substantive
participation in litigation is what generally gives rise to waiver not pre-litigation
activities See eg Welborn Clinic v MedQuist Inc 301 F3d 634637 (7th Cir
2002) ([E]ven strong-arm tactics like the withholding of important medical records
while demanding payment are not automatically enough to constitute an implied
waiver of the agreements arbitration provision) Highlands Wellmont Health
Network Inc v John Deere Health Plan Inc 350 F3d 568 574 (6th Cir 2003)
(finding no waiver where defendant in a pre-litigation letter discussing dispute
resolution declined at [that] point to agree to arbitration but then immediately
invoked the arbitration provision upon the commencement of litigation by filing a
motion to compel arbitration and stay the proceedings) Servpro Intellectual Prop
Inc v Stellar Emarketing Inc No 315-cv-1267 2016 WL 6948336 at 8 (MD
13
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
Tenn Nov 28 2016) (Even if one assumes that the e-mail exchange put
[defendant] on notice of a potential dispute under its contract with [plaintiff]
though declining to immediately initiate arbitration is insufficient to support a
finding ofwaiver)3
Servpro is particularly instructive There on a third-party complaint the
plaintiff alleged that the defendant waived its right to arbitrate due to an alleged
pre-litigation delay in asserting its rights arguing that the defendant should have
initiated arbitration proceedings as soon as the parties began exchanging emails
regarding the defendants dissatisfaction with the plaintiffs search engine
optimization service because it put the defendant on notice of a potentialdispute
Servpro 2016 WL 6948336 at 8 The court rejected this argument finding that
declining to immediately initiate arbitration is insufficient to support a finding of
waiver Id The court further explained that there is nothing in the FAA
suggesting that a party loses its arbitration rights merely by failing to exercise
them at the earliest possible opportunity Id Because at the time of the email
exchange the defendant had no way of knowing with any certainty how serious or
contentious the dispute would become the defendants alleged failure to rush to
The lone exception appears to be the situation where pre-litigation one party demands arbitration but the other categorically refuses to participate See eg Growtech Partners v Accenture LLP 118 F Supp 3d 920941 (SD Tex 2015) (holding that categorical refusals to arbitrate constituted waiver where Accenture India responded to all Abrahams arbitration demands by stating repeatedly and clearly that Abrahams claims were not arbitrable as well as without merit and that Accenture would not arbitrate) That is unlike this case here the Bonar Owners did not request arbitration and Chevron of course never resisted it
14
3
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
arbitration as soon as the bare potential for a dispute became apparent was in no
way inconsistent with its later reliance on the arbitration provision Id
The present case is similar Like Servpro here the Bonar Owners alleged
that Chevron should have initiated arbitration before taking the cost deductions
(App 159a at 327-9) (The Bonar Owners Counsel Thats a question that they
should have sought before they deducted They should have sought that to be
decided in arbitration to give them the authority to deduct) But like Servpro
Chevron also had no way of knowing how serious or contentious the dispute would
be or whether a formal dispute would arise at all Therefore the failure to rush to
arbitration as soon as the bare potential for a dispute became apparent in this case
should similarly not be viewed as a waiver of the right to arbitrate
Finally even ifpre-litigation conduct could as a general matter waive a right
to arbitrate there is no support to suggest that the kind of conduct here should
suffice Chevron acted under the lease by taking cost deductions it believed it was
entitled to take in calculating the Bonar Owners royalties There is no support for
a finding that performance or non-performance under one part of a contract serves
to waive the arbitration provision in the contract Cf Pakinghouse Workers v
Needham 376 US 247 253 (1964) (holding that breach of one provision of contract
does not waive arbitration provision in the contract)
2 Interpreting the Arbitration Agreement to Permit Waiver Is Untenable
A second reason that the Circuit Courts decision should be reversed is
because it implicitly relies on an untenable interpretation of the arbitration
15
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
agreement While it is not apparent from the Circuit Courts order the Bonar
Owners argued below that the language of the arbitration provision should be
interpreted to mean that any question regarding the lease must be resolved by
arbitration even if such a question was not presently disputed or did not rise to the
level of seriousness to warrant formal legal proceedings (See App 158a-162a)
That is the Bonar Owners argued that the arbitration provision which
states that [a]ny question concerning this lease or performance thereunder shall be
ascertained and determined by three disinterested arbitrators means that if one of
the parties thought its conduct might lead to a potential dispute that party was
obligated to first go to arbitration to obtain a determination (See App 158a-162a
at 3122-3523) According to this reasoning the Bonar Owners argued that
Chevron could not unilaterally take cost deductions without pre-approval from the
arbitrators and by doing so it waived the right to arbitrate To the extent that the
Bonar Owners seek to advance this same argument before this Court it should be
rejected
Chevrons decision to take cost deductions without first commencing
arbitration was entirely consistent with the plain language of the arbitration
agreement which states that only questions under the lease must be arbitrated
Words in a contract should be accorded their common and customary meaning
Westfield Ins Co v Pinnacle Grp LLC 137 F Supp 3d 912 917 (SD W Va
2015) This Court has turned to dictionary definitions to determine the plain
meaning of words used in a contract See Natl Union Fire Ins Co ofPittsburgh v
16
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
Miller 228 W Va 739 748 724 SE2d 343 352 (2012) Blacks Law Dictionary
defines question as an issue in controversy a matter to be determined BLACKS
LAw DICTIONARY (10th ed) Therefore in this context the word questions means
disputes which need to be resolved This understanding of questions is especially
persuasive here because arbitration is a form of dispute resolution It is self-evident
that there is no need to resort to a dispute resolution process until there is an actual
dispute Put simply a question under the lease only becomes relevant for the
arbitration provision when the parties do not agree on the answer
When Chevron decided to take cost deductions there was no dispute between
the parties and thus the arbitration provision was not triggered Any other
interpretation would lead to the absurd result that the parties could not do
anything under the lease without first consulting a panel of three arbitrators See
Dunbar Fraternal Order of Police v City of Dunbar 218 W Va 239 244624 SE2d
586591 (2005) (Generally this Court will not interpret a contract in a manner
that creates an absurd result) This would include critical mutually beneficial
activities like deciding (i) whether to include the leasehold as part of an oil and gas
drilling unit (ii) when and where to drill any wells (iii) where to send royalty
checks (iv) when to send royalty checks and (v) whether any improvements should
be made to access roads used pursuant to Chevrons drilling and producing
operations In essence the Bonar Owners interpretation of the arbitration
17
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
agreement would cripple the parties ability to effectuate the purpose of the lease
and should be rejected4
Additionally such a lease interpretation leads to a circular result which
would effectively render meaningless the parties arbitration provision Under the
Bonar Owners lease interpretation~ the very existence of a dispute automatically
waives the ability to utilize the dispute-resolution procedure that is designed to
resolve that dispute Indeed based on the Bonar Owners view the arbitration
provision must be used to pre-approve conduct that may never be in dispute but
could not be used to resolve conduct that is actually disputed This interpretation is
unreasonable and renders the arbitration agreement largely meaningless and
therefore should be avoided See Dunbar 624 SE2d at 591 (recognizing that
specific words or clauses of an agreement are not to be treated as meaningless or
to be discarded if any reasonable meaning can be given them consistent with the
whole contract) (all internals omitted)
Finally the Bonar Owners interpretation is at odds with that of other courts
that have enforced identically worded arbitration provisions That is several courts
have examined an arbitration provision identical to the one at issue none of those
Another reason this absurd result cannot be what the parties intended is that it would saddle them with enormous arbitration expenses which the parties bear equally as a result of repeatedly having to initiate arbitrations This possibility for repeated arbitrations would expose both Chevron and the Bonar Owners to potentially abusive behavior Indeed if Chevron had actually initiated arbitration against the Bonar Owpers every time it was preparing to act under the lease (thereby forcing the Bonar Owners to cover their share of the costs of the arbitration) the Bonar Owners would likely challenge this behavior as an abuse of the arbitration agreement
18
4
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
courts found that a party waived its right to arbitration by allegedly unilaterally
acting under the lease
bull Heller v TriEnergy Inc No 512-cv-45 2012 WL 2740870 (ND W Va July 92012) The lessor alleged among other things that defendants made the decision to pool the lessors property in bad faith Id at 3
bull Robbins v Chesapeake Appalachia LLC No 312-cv-1788 2012 WL 6012344 (MD Pa Dec 3 2012) The lessors alleged defendant breached the lease by drilling and blasting the property during the construction of a well pad without authorization Id at 2
bull Fellowship v Chesapeake Energy Corp No 415-cv-2275 2016 WL 5661607 (ND Ohio Sept 29 2016) The lessors alleged that defendants allegedly fraudulently underpaid oil and gas royalties Id at 1
The court did not find in any of thee cases that unilateral pre-litigation activity
regarding a matter that could have been a potential dispute under the lease
resulted in the waiver of the right to arbitrate And in each case the court
compelled arbitration
3 The Bonar Owners Did Not Present Sufficient Concrete Evidence to Support Their Waiver Claim
Even assuming that pre-litigation conduct could give rise to waiver the
Bonar Owners have failed to establish sufficient evidence to carry their heavy
burden
To establish waiver of a contractual right to arbitrate the party asserting
waiver must show that the waiving party knew of the right to arbitrate and either
expressly waived the right or based on the totality of the circumstances acted
inconsistently with the right to arbitrate through acts or language Parsons 785
19
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
SE2d at 853 The party opposing arbitration bears the heavy burden of proving
waiver MicroStrategy 268 F3d at 251 (internal citation and quotation omitted)
That proof must be concrete not merely speculative Id at 252 (citing Green Tree
Fin Corp-Alabama v Randolph 531 US 79 (2000raquo
This heavy burden derives from the strong public policy recognizing
arbitration as an expeditious and relatively inexpensive forum for dispute
resolution Parsons 785 SE2d at 852 In light of the favored status of
arbitration any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration whether the problem at hand is the construction of the
contract language itself or an allegation of waiver delay or a like defense to
arbitrability Moses H Cone Meml Hosp v Mercury Constr Corp 460 US 1 24shy
25 (1983)
The Bonar Owners waiver argument fails because they did not present any
evidence that could support the Circuit Courts finding that Chevron acted under
the lease and did in fact waive the argument of arbitration in that provision
(App 179a at 5210-13) Nothing alleged in the complaint or argued by counsel for
the Bonar Owners during the oral argument is evidence See Cambridge Capital
Grp v Pill 20 Fed Appx 121 124-25 (4th Cir 2001) (Allegations contained in a
complaint are not evidence) United States v White 366 F3d 291 300 (4th Cir
2004) (holding that an attorneys unsworn argument does not constitute evidence)
And nothing in Mr Bonars affidavit proves that Chevron ever acted unilaterally
20
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
in commencing certain cost deductions from plaintiffs royalties without first
seeking through arbitration the authority to do so (App 2a)
In his affidavit Mr Bonar claims that he has directly interacted with
representatives of Chevron on a variety of questions concerning the Lease and
resolved the questions without arbitration (App 184a at ~ 13) This vague
statement does not prove that Chevron acted unilaterally in taking cost
deductions because it does not describe what questions were raised who raised the
questions how they were resolved and who resolved them In other words no one
knows if those questions related to cost deductions or not Accordingly this isolated
and unsupported statement from an affidavit offered at the eleventh hour falls far
short of the concrete proof needed to establish waiver MicroStrategy 268 F3d at
252 The Circuit Courts decision should be reversed for this reason alone
4 Alternatively the Circuit Court Erred by Ruling on the Bonar Owners Waiver Challenge Because Waiver Is a Procedural Matter for the Arbitrator Not the Court to Decide
A recent decision by the United States Supreme Court suggests that the issue
of waiver at least when raised as a precondition to arbitrate like in this case
should be decided by the arbitrators It was therefore error for the Circuit Court to
even decide this issue
The Supreme Court recently stated that courts presume that the parties
intend arbitrators not courts to decide disputes about the meaning and application
of particular preconditions for the use of arbitration BG Grp PLC v Republic of
Argentina 134 S Ct 1198 1207 (2014) (citing Howsam v Dean Witter Reynolds
21
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
Inc 537 US 7986 (2002raquo These procedural matters include claims of waiver
delay or a like defense to arbitrability Id (quoting Moses H Cone 460 US at
25)
Although there is some confusion over the potential reach of this language if
the Supreme Courts statement is to be given any effect then it must apply to this
case5 The Bonar Owners have claimed that Chevron waived its right to arbitrate
by not complying with the purported contractual precondition of submitting all
questions under the lease to arbitration This precise type waiver argument is
within the statement in BG Group and is thus presumptively for the arbitrators
not the court to decide See eg James v Client Servs Inc No 14-24802015 WL
3649473 at 6 (D Kan June 11 2015) (If a waiver challenge is a dispute over a
particular procedural precondition a presumption exists that the challenge should
be heard by the arbitrator) Flores v Gmri Inc No 115-cv-l073 2016 WL
726485 at 4 (MDNC Dec 15 2016) (The Court concludes that Flores claim of
waiver must be decided by the arbitrator and not by this Court)
c The Bonar Owners Unconscionability Argument Should Be Rejected
In their briefing below the Bonar Owners sole argument in opposition to
Some courts have found that waiver claims based on litigation activity are still for the court to decide See eg Ehleiter v Grapetree Shores Inc 482 F3d 207217-18 (3d Cir 2007) ([T]he Supreme Court did not intend to upset the traditional rule that courts not arbitrators should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court) But the Bonar Owners waiver claim here is similar to a claim that a precondition to arbitration was not met it is certainly not a claim of waiver based on Chevrons litigation activity
22
5
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
Chevrons motion to compel arbitration was that the motion should be denied because
the arbitration agreement is unconscionable (See App 89a-98a) Chevron anticipates
that the Bonar Owners may attempt to revive this argument on appeal as an
alternative way to affirm the Circuit Courts order Although the Circuit Court
expressly declined to address unconscionability in its order (App 2a) this Court
should reject the argument and find that the Bonar Owners have not met their burden
of establishing that the arbitration agreement in the lease is unconscionable
Concluding that an arbitration provision is unenforceable on grounds of
unconscionability requires a finding that the provision in issue is both procedurally
and substantively unconscionable See Nationstar Mortg LLC v West 237 W Va
84 88 785 SE2d 634 638 (2016) (internal quotation marks and citation omitted)
Thus a failure to prove either component is fatal to establishing unconscionability
Id [T]he burden of proving that a contract term is unconscionable rests with the
party attacking the contract Id (quoting Brown ex reI Brown v Genesis Healthcare
Corp 228 W Va 646 680 724 SE2d 250284 (2011) revd on other grounds sub
nom Marmet Health Care Center Inc v Brown 132 S Ct 1201 (2012) (per curiamraquo
1 The Bonar Owners Failed to Establish Procedural Unconscionability
Procedural unconscionability is concerned with inequities improprieties or
unfairness in the bargaining process and formation of the contract Nationstar 785
SE2d at 638 (internal marks and citation omitted) These inadequacies in the
bargaining process include
bull The age literacy or lack of sophistication of a party
23
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
bull Hidden or unduly complex contractual terms
bull The adhesive nature of the contract and
bull The manner and setting in which the contract was formed including whether each party had a reasonable opportunity to understand the terms of the contract
Id
Procedural unconscionability often begins with a contract of adhesion Brown
v Genesis Healthcare Corp 229 W Va 382 393 729 SE2d 217 228 (2012) A
contract of adhesion is one drafted and imposed by a party of superior strength that
leaves the subscribing party little or no opportunity to alter the substantive terms
and only the opportunity to adhere to the contract or reject it Id
The Bonar Owners did not claim (nor could they) that the lease was an
adhesion contract offered on a take it or leave it basis with little to no opportunity
for alteration Indeed the very first page of the lease contains a handwritten
alteration to the Rental Payment provision (See App 35a at ~ 6) This alteration
clearly demonstrates that some bargaining did occur and evidence[s] [the Bonar
Owners] understanding of the lease terms Dytko v Chesapeake Appalachia LLC
No 513-cv-150 2014 WL 2440496 at 5 (ND W Va May 302014) (holding the
arbitration provision in an oil and gas lease was not procedurally unconscionable)
Without establishing that the arbitration agreement was a contract of adhesion there
can be no procedural unconscionability and any unconscionability challenge fails See
State ex rel Johnson Controls Inc v Tucker 229 W Va 486498 729 SE2d 808820
(2012)
24
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
Even if the arbitration agreement were a contract of adhesion it still is not
procedurally unconscionable Contracts of adhesion are not per se unconscionable
State ex rel Ocwen Loan Servicing LLC v Webster 232 W Va 341358 752 SE2d
372 389 (2013) The remaining factors concerning procedural unconscionability
would still need to be examined Dytko 2014 WL 2440496 at 5 In this case the
Bonar Owners have not met their burden of demonstrating those factors weigh in
favor of finding procedural unconscionability
The Bonar Owners did not claim that there was unfairness in the bargaining
process or formation of the contract (including the arbitration provision) At no point
did the Bonar Owners claim that they were unsophisticated parties incapable of
understanding the nature of the contract or the provisions contained therein Rather
the Bonar Owners claimed that Mr Bonar has a high school education and that no
one explained the arbitration agreement to him (App 183a-184a at -r-r 5 9-10) But
that is not sufficient [W]hile the parties need to be provided a reasonable
opportunity to understand the terms of the contract there is no requirement that one
party must explain the terms of the contract to the other Dytko 2014 WL 2440496
at 5 Therefore while the plaintiffs imply that the defendant should have explained
what arbitration was the defendant was not under any obligation to do so Id
The language of the arbitration provision is straightforward it states that any
question concerning the lease must be determined by three arbitrators The provision
itself was not in any way hidden or buried in a voluminous contract in fact in the
lease which is only three pages long the provision is conspicuously labeled
25
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
ARBITRATION in all capital letters (App 36a at ~ 17) Courts have found
procedural unconscionability lacking under similar circumstances See eg US ex
rel TBI Investments Inc v BrooAlexa LLC 119 F Supp 3d 512532 (SD W Va
2015) (The ADR Clause is thus not hidden in a large agreement but readily apparent
in fairly short contracts) Kelley v Sallie Mae Inc No 514-cv-138 2015 WL
1650080 at 7 (ND W Va Apr 142015) (finding that arbitration provisions in
promissory notes for student loans were not procedurally unconscionable where the
contracts were allegedly pre-printed form contracts with arbitration agreements
buried at the end of the 8th and 9th pages in small print)
Because the Bonar Owners failed to prove that the lease was procedurally
unconscionable in any way any unconscionability argument necessarily fails See
Dytko 2014 WL 2440496 at 6 (This court recognizes that a finding that an
arbitration clause is unconscionable requires both a finding of procedural and
substantive unconscionability) EQT Corp v Miller No 1II-cv-197 2012 WL
3839417 at 6 (ND W Va Sept 5 2012) (As this Court can find nothing to support
procedural unconscionability under West Virginia precedent the ADR Agreement
and ADR Program cannot be unenforceable based upon unconscionability)6
Courts from other jurisdictions agree that a lack of procedural unconscionability is dispositive See eg Somerset Consulting LLC v United Capital Lenders 832 F Supp 2d 474488 (ED Pa 2011) (holding that court need not reach the issue of substantive unconscionability because plaintiffs allegations as to procedural unconscionability are as a matter oflaw inadequate to sustain a challenge to the arbitration clause) Klopfer v Queens Gap Mountain LLC 816 F Supp 2d 281291 (WDNC 2011) (Having found that the Plaintiffs have not shown procedural unconscionability in any degree the Court finds it unnecessary to address the issue of substantive unconscionability) Powell v ATampTMobility LLC 742 F
26
6
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
2 The Bonar Owners Failed to Establish Substantive Unconscionability
Because the Bonar Owners cannot establish that the arbitration agreement is
procedurally unconscionable the Court need not address substantive
unconscionability See Nationstar 785 SE2d at 638 Nevertheless if this Court were
to consider this issue it should find that the Bonar Owners have also failed to prove
substantive unconscionability
The focus of substantive unconscionability is on the nature of the contractual
provisions rather than on the circumstances surrounding the contracts formation
Id at 641-42 Substantive unconscionability can only be found where a contract term
is one-sided and will have an overly harsh effect on the disadvantaged party Id at
642 The Bonar Owners argued below that the arbitration provision in the lease is
substantively unconscionable because the alleged costs of the arbitration process are
disproportionately high (App96a)
The arbitration provision states that the cost of the arbitration will be borne
equally by the parties (App 36a at -r 16) When analyzing fee-splitting arbitration
provisions like the one at issue here the substantive unconscionability inquiry should
be focused on whether the arbitral forum in a particular case is an adequate and
accessible substitute to litigation Bradford v Rockwell Semiconductor Sys Inc 238
F3d 549 556 (4th Cir 2001) This inquiry must be made on a case-by-case basis
Supp 2d 1285 1291 (ND Ala 2010) (Because Powell has not shown procedural unconscionability it is not necessary for the Court to address the issue of substantive unconscionability)
27
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
that focuses among other things upon the claimants ability to pay the arbitration
fees and costs the expected cost differential between arbitration and litigation in
court and whether that cost differential is so substantial as to deter the bringing of
claims Id Significantly the challenging party bears the substantial evidentiary
burden of showing a likelihood of incurring prohibitive arbitration costs Muriithi
v Shuttle Exp Inc 712 F3d 173 181 (4th Cir 2013) This showing must relate to
the specific costs that the plaintiff will incur as a result of arbitrating the matter not
speculative contentions about what the arbitration could cost Donley v Sallie Mae
Inc No 514-cv-165 2015 WL 1650097 at 8 (ND W Va Apr 142015)
Here the Bonar Owners argued that the arbitration agreement was
substantively unconscionable because they claim that the arbitration would cost in
excess of $40000 and the amount in controversy is only $2266 (App97a) The
Bonar Owners conclusory assertions however are insufficient to meet their burden of
proving specific prohibitive arbitration costs in this case for the following three
reasons
First the Bonar Owners did not present any competent evidence to support
their claim that the arbitration would cost in excess of $40000 The Bonar Owners
sole proof consisted of an affidavit from a local attorney-who is not representing the
Bonar Owners in this matter-who claimed that the arbitration costs for an unrelated
dispute involving different claims brought by different landowners against a different
oil and gas producer totaled $4629048 (App116a) The Bonar Owners admit that
the case handled by the affiant was materially different because [u]nlike in the
28
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
instant case [the affiants] clients sought the termination of the lease (App95a)
Courts have repeatedly held that estimates or offers of proof of what arbitrators might
have charged in a different case do not constitute proof of what arbitration would cost
in the case at issue See Muriithi 712 F3d at 182 (rejecting estimate contained in
attorney affidavit because that estimate bears no relation to the facts of the present
case) Bird v Turner No 514-cv-97 2015 WL 5168575 at 4 (ND W Va Sept 1
2015) (refusing to consider affidavit from their co-counsel regarding the costs of
arbitration for an unrelated matter in an effort to prove the prohibitive costs of
arbitration)7
Second even accepting as true the Bonar Owners speculative guess that
arbitrating this matter would cost the parties $40000 the Bonar Owners substantive
unconscionability argument still fails because the Bonar Owners (one of which is a law
firm) have not presented any evidence concerning their inability to pay their share of
those costs See Nationstar 785 SE2d at 643 (reversing denial of motion to compel
arbitration where [i]n determining that the costs of arbitration were necessarily
oppressive the circuit court relied upon a record devoid of evidence that the Wests
The Court should also reject the Circuit Courts impromptu effort to come up with a rough estimate of the potential costs of arbitration during the oral argument Nothing offered during the oral argument amounted to actual evidence regarding the potential costs of a potential arbitration The Circuit Court relied on estimates from counsel regarding a speculative rate that potential arbitrators might charge and a guess as to how much time it might take to render a decision Notably before obtaining these estimates the Circuit Court advised counsel Youre not under oath Im just trying to get a ball park (App 144a at 1720-21)
29
7
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
could not pay the costs of arbitration) In fact the Bonar Owners have never claimed
that they cannot afford the potential costs of arbitration
Third the Bonar Owners position that the amount in controversy in this case
is limited to $2266 is incorrect (App 92a) Without any support from this or any
other West Virginia court the Bonar Owners argued below that the amount in
controversy in this declaratory judgment action should be limited to the amount due
and owing as of the time the suit is commenced (App93a) Not so
In declaratory judgment actions it is well established that the amount in
controversy is measured by the value of the subject of the litigation Dwyer v Range
Resources-Appalachia LLC No 514-cv-21 2014 WL 1648270 at 2 (ND W Va Apr
242014) (internal quotation omitted) The Bonar Owners are seeking a declaration
that would permanently alter Chevrons rights and obligations under the Lease (See
App 9a at ~ 24(braquo (asking the Circuit Court to prohibit Chevron from exacting any
future cost deductions of any kind) Consequently if the Bonar Owners are
successful in proving their claim Chevron will no longer be allowed to take any
deductions from the Bonar Owners royalty payments in the future This impact on
Chevron certainly exceeds the $2266 claimed in the Complaint See Dwyer 2014 WL
1648270 at 2 (finding in an oil and gas dispute that the value of the leases
affected is what determines whether the amount in controversy is satisfied)
The Bonar Owners argument below that the arbitration provision is
substantively unconscionable based on the purported high costs of arbitration fails
30
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
The unconscionability argument should be rejected to the extent that it is raised again
by the Bonar Owners
31
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
CONCLUSIONmiddot
For the foregoing reasons Chevron respectfully requests that this Court
reverse the Circuit Courts decision and remand with instructions to compel the
Bonar Owners to arbitrate their claim
cyL-April 12 2017
J Nicholas Ranjan (No 12946) KampL Gates LLP KampL Gates Center Pittsburgh PA 15222 (412) 355-6500 (telephone) (412) 355-6501 (facsimile) nicholasranjanklgatescom
Counsel for Petitioner Chevron USA Inc
32
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)
CERTIFICATE OF SERVICE
I hereby certify that on April 12 2017 I caused to be served a true and
correct copy of the foregoing PETITIONERS BRIEF via Federal Express on the
following counsel of record
Anthony 1 Werner Joseph J John
John amp Werner Law Offices PLLC Board of Trade Building Suite 200
80-12th Street Wheeling WV 26003
J Nicholas Ranjan (No 12946)